European shares advanced in low volumes Tuesday, with investors buying miners following a surge in metals prices and selecting some defensive shares.
Analysts said the rebound, which followed a near 7 percent fall in 10 days, did not seem sustainable due to growing unease over the debt situation in Europe and the United States.
The best trading strategy in the current environment could be to keep a fair amount of cash and invest the rest in defensive stocks such as utilities and food and beverages besides selecting individual companies with strong balance sheets and good dividend potential, they said.
The European food and beverages index <.SX3P> and utilities sector <.SX6P> were up 1.1 percent and 0.7 percent respectively, outperforming the benchmark STOXX Europe 600 index <.STOXX> which was up 0.4 percent to 225.55 points at 12:32 p.m. Miners <.SXPP> gained 1.3 percent, taking strength from stronger metals prices.
Today's bounce might well be a temporary one. For the bulls, it looks like an uphill struggle into the year end, Angus Campbell, head of sales at Capital Spreads, said.
The market remains shrouded in the dark cloud of the debt crisis on both sides of the Atlantic and from a technical and fundamental point of view, the outlook for equities continues to look rather negative.
Goldman Sachs cut its three-month target for the STOXX Europe 600 to 195 points, citing worries about the failure of euro zone policymakers to come up with comprehensive measures to avoid contagion in the sovereign debt crisis.
High bond yields in the euro zone have made investors jittery, fearing the region's debt crisis could deepen further as policymakers struggle to present a sound plan to tackle the situation and implement tough austerity measures. In the United States, lawmakers abandoned their effort to rein in the debt.
Spain's Treasury paid the highest yields in 14 years to issue short-term bills. Italy's 10-year bond hovered above 6.7 percent, but below a recent level of more than 7 percent that was considered unsustainable.
The FTSEurofirst 300 <.FTEU3> index of top European shares was up 0.5 percent at 924.10 points after falling 3.3 percent in the previous session to its lowest close in nearly seven weeks. Volumes were 27 percent of it 90-day average by midday trade.
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets said investors would wait this week for consumer spending figures during the Thanksgiving holiday period in the United States which could give some direction to the equity market.
However, expect more nervousness and volatility over the coming weeks and months. Capital conservation remains the key, he said.
The euro zone's blue chip Euro STOXX 50 <.STOXX50E> rose 0.6 percent to 2,173.94 points. Charts showed the index hovered around a key support level at 2,162 -- the 23.6 percent Fibonacci retracement from the September 23-29 impulse wave.
Dmytro Bondar, technical analyst at RBS, said that after breaking through the lower Bollinger band 20/2/2 and forming a Marubozu candlestick pattern Monday, a pivot point emerged at the middle of the candle at 2,193, which is likely to become the main resistance in the short term.
Combined with a trough in the bandwidth, it points to a high chance of the downtrend continuation as the 2,162 level gets broken on a sustained basis. Daily momentum tools are mixed, but mostly bearish, he said, adding investors might consider selling when the index moves up to around 2,210.
In a market which was likely to witness more down days than up days, fund managers suggested buying defensive companies as well as firms that offered reasonable dividends and growth.
Margaret Lawson, manager of SVM UK Growth fund, said the fund had added companies like Imperial Tobacco
This year, investing for growth seems particularly challenged. Sentiment swings make it hard for investors to focus on long term prospects and fundamental analysis. However, the volatility can be turned to advantage, creating opportunities for the portfolio, Lawson said.
Among individual movers, Thomas Cook Group
(Editing by Elaine Hardcastle)